Value investing strategy

Why do value stocks have high dividend yield?

I thought “value” companies need money to reinvest in their businesses, thus, they should pay less dividend or no dividend at all? Or is it because their prices are low, resulting in high div yield?

Value stocks are cheap. Share price is low relative to earnings per share. Assuming a good dividend payout ratio, the dividend paid out is relatively high compared to the share price. Therefore the stock has a high dividend yield.

[This is all the CFA simplification by the way. I actually work at a value fund. We would actually prefer no dividends because then we just have to reinvest it. There are better ways for a company to use their cash and/or return it to shareholders.]

It’s because value stocks are usually sizable, and only (exceptions aside) sizable companies pay companies dividends. It’s not a rule of size, but it’s a problem of growth opportunity. A comapny may fall under value and be quite small, if it resides in a small saturated market.

_ Dividends _, perhaps?

If a company keeps its money so that it can grow, then it’s a growth company (sort of by definition, no?).

If a company doesn’t keep its money and doesn’t grow, then it’s a value company (and is paying dividends).

Oops laugh

I tend to think of value companies as companies that are undervalued vs peers, these are normally smaller companies. Hence, they would need to pay out less to reinvest in value-added businesses. :frowning:

There a lot of characteristics that define a value-oriented company, and not one fundamental perse.

They usually tend to be sizable, pay out dividends, trade at low multiples (P/B primarily), and exhibit slow growth and volatile earnings.

Although I’m not convinced about the volatility part, but that’s what the CFAI wants you to believe.

I agree, from the CFAI text, there are three different sub-styles of value investing (hence three different way to detect value investments):

  • Low P/E

  • Contrarian (=Low P/B)

  • High yield (= high dividends)

The value investing style has at least three substyles: low P/E , contrarian , and high yield. A low P/E investor will look for stocks that sell at low prices to current or normal earnings. Such stocks are generally found in industries categorized as defensive, cyclical, or simply out-of-favor. The investor buys on the expectation that the P/E will at least rise as the stock or industry recovers. A contrarian investor will look for stocks that have been beset by problems and are generally selling at low P/Bs, frequently below 1. Such stocks are found in very depressed industries that may have virtually no current earnings. The investor buys on the expectation of a cyclical rebound that drives up product prices and demand. A yield investor focuses on stocks that offer high dividend yield with prospects of maintaining or increasing the dividend, knowing that in the long run, dividend yield has generally constituted a major portion of the total return on equities